How the Supreme Court's "ObamaCare" Ruling Could Affect Stocks

When President Obama writes his memoirs, he will surely point to Nov. 14, 2011 as one of the worst days of his presidency. That's when the U.S. Supreme Court announced it would hear legal challenges against the Administration's sweeping overhaul of the United States' health care system. Administration officials spent thousands of hours horse-trading with various members of Congress, ultimately producing a document which, according to one recent poll, roughly two-thirds of voters would like to see altered or overturned.

For more conservative voters, the legislation smacks of government overreach and a loss of personal liberty. For liberal voters, the overhaul didn't go far enough, leaving too many profits on the table for private insurers, as the "public option" component was negotiated out of existence.

Of course the Supreme Court won't simply hand down a ruling based on a poll of current voter preferences. Instead, the justices will look at various aspects of the legislation and determine whether any or all aspects need to be rolled back.

With a ruling expected on or before June 25, it's time to prep your portfolio for the various possible outcomes. (The Supreme Court holds its press conference on Thursday, June 14, leading many to expect an official announcement to come on June 14 or June 21 and not June 25, which is the last day of the current session.)

$938 billion must be found somewhere
The effort to expand health care insurance to all eligible citizens would cost nearly $1 trillion, according to the Congressional Budget Office. To pay for the legislation, the government would save money or raise revenue by:

Some opponents of the legislation, even as they support its goals, question the feasibility of these savings targets, adding the legislation would only add to the government's deficit problems. But the Supreme Court is not assessing the likelihood of government targets being met; it's solely focusing on how the program affects the rights of states and individuals.

But the piecemeal nature of the legislation means that some -- though not all -- aspects of the legislation may be struck down. Analysts at Bernstein Research assign a 50% to 70% likelihood that the Court will recommend a partial rollback, and say there is only a 15% chance the whole package will be shot down (and another 15% chance that the Court will leave the legislation intact).

As far as the Obama Administration is concerned, a partial rollback would have the same effect as a full rollback. By eliminating any components needed for either cost-savings or revenue generation, a huge funding gap would emerge, making it nearly impossible to extend health insurance to 32 million uninsured citizens.

Who wins? Who loses?
The nation's health care insurers are anxiously awaiting the Court's ruling. These firms tacitly agreed to caps on their profit margins in exchange for the chance to serve many more customers. So a decision to strike down the mandate requiring all citizens to get insurance without a corresponding decision to free them from the profit-margin caps would instantly lead their earnings to suffer.

Conversely, if the Supreme Court struck down the requirement that all citizens must buy health insurance, but maintained the Obama Administration's plan to extend Medicaid to all uninsured people , would lead to huge profit gains for health care insurers that participate in Medicaid. Molina Healthcare (NYSE: MOH), Amerigroup (NYSE: AGP), Centene (NYSE: CNC) and WellCare (NYSE: WCG) would be among them. The entire group would see profits rise by 19%, according to Bernstein Research. It predicts a 20% chance that this will be the ruling. (On June 11, these stocks took a sharp hit as Centene warned of profit pressures. The timing of the pre-announcement may have been more than coincidental.)

Guaranteed issuance?
Insurers hate the idea of being forced to extend insurance to high-risk patients. Yet they agreed to take on these patients as long as all patients -- high-risk and low-risk -- were enrolled. Insurers realized that if they had to cover any patients seeking coverage, without all being required to participate, then people would simply wait until they got sick to apply for insurance.

Based on comments from Supreme Court Justices in hearings a few months ago, a majority of them appear inclined to strike down the individual mandates and the guaranteed-issuance clause. If these components of the legislation are shot down, then investors will likely see an immediate rally in insurance stocks such as Coventry Health (NYSE: CVH), Humana (NYSE: HUM), and Aetna (NYSE: AET).

The "no-action" play
Analysts at Citigroup suggest that companies running for-profit hospitals would see a huge rally if the Supreme Court decides to take no action. They figure hospital stocks could pop up as much as 15% on decision day if "no action" is the verdict. Hospitals currently take a huge hit to profits by providing emergency services to many uninsured patients that fail to pay their bills. The aim of the legislation was to eliminate this bad-debt risk. These analysts say Community Health Systems (NYSE: CYH) and Tenet Healthcare (NYSE: THC) offer the most upside from a "no-action" decision.

Yet Citigroup's analysts concede that a mixed verdict from the Court is likely, returning to the pre-legislation status quo. Even so, "the stocks might trade 5-10% higher on decision day as perceived uncertainty declines." In such a scenario, they recommend Universal Health Services (NYSE: UHS) and HCA (NYSE: HCA) as top hospital stock names, as they may offer the best risk/reward profile in a mixed verdict.

Risks to Consider: There may be a great deal of initial confusion if there is a mixed verdict as to prospective winners and losers, so be prepared for gut-wrenching swings in these stocks after the decision is announced.

Action to Take --> A decision to overturn parts of the legislation may in fact make the entire legislation untenable. Indeed, a victory by Republican presidential candidate Mitt Romney this fall would also likely lead to the legislation's repeal. Still, many voters understand that we pay too much for health care and receive too little in return, so profit pressures for health care providers, drug firms and medical-device makers are likely to deepen -- regardless of who will be sitting in the Oval office next year. T

This means it may be wise to book profits if any of these sectors have a relief rally as we return to the status quo for now. Otherwise, if you're feeling bold enough to read the tea leaves and predict an outcome, then the stocks I mentioned above should be your guide to profiting from the possible outcomes.